The impeachment of South Korean president Geun-hye Park in December following a corruption and cronyism scandal sheds light on the politician-chaebol nexus in South Korea, said Krishnendra Dubey, assistant manager of investment research and analytics at consultant Aranca.
Park is alleged to have abused her position to help an aide secure tens of millions of dollars of funding from chaebols for her foundations.
“It further exposes the crony capitalism pervading the South Korean economy and raises corporate governance issues.
Equity investors should be wary of “investing in a country facing political and policy paralysis, and an ever burgeoning political scandal threatening to engulf some of the biggest corporates and politicians in the nation”.
Norman Boersma, CIO of Franklin Templeton Investments’ Templeton global equity group, added: “Many of Korea’s best companies are still controlled by a handful of powerful families via small equity stakes and complicated cross-shareholding structures that can disadvantage minority shareholders. That is changing slowly, but not always for the right reasons.”
Boersma manages the Templeton Growth Fund, which holds two chaebol stocks: Samsung Electronics, the top holding accounting for 3.05% of portfolio as of November-end, and Hyundai.
However, he noted that although corporate governance is not ideal in the country, he sees value in holding the chaebol stocks.
“[A]s investors in Samsung Electronics, we’ve probably benefited from the family’s reluctance to do anything that would blatantly disadvantage minority shareholders at the most visible part of its empire, and we should continue to benefit from the upstreaming of dividends as consolidation continues.
“Overall, it’s not a perfect structure, but we also can’t ignore the immense value that the Lee family [owners] have created for Samsung shareholders over the 15 years we have owned the stock.”
Commenting on Hyundai, he said “weak corporate governance is a risk factor with this holding, but we believe the risk is sufficiently discounted by near-record low valuations, which fail to reflect the company’s long-term growth potential”.
Kenny Wen, wealth management strategist at Sun Hung Kai Financial, is also cautious on South Korea for additional reasons.
“[President-elect] Trump’s trade policies, expected to be out in late 2017 or early 2018, could have a negative impact on export-oriented Korea. In particular, a rise in commodity prices coupled with weaker trade with the US can further hit Korea, which imports commodities and exports goods,” he explained.
The performance of Korean equity funds selling in Hong Kong and Singapore, which have plunged since the impeachment of the president on December 9, versus the benchmark KOSPI index and the MSCI Asia ex-Japan index. The first chart is for the past three months and the second for the past three years, according to FE.